Is a Home Warranty a Good Investment?

Read the fine print before you buy

En español | You just bought a home, so what's a few hundred dollars more every year to protect yourself against everything that could go wrong with it?

Home warranty companies often use the sales pitch that you wouldn't buy a new car without a warranty, so why would you buy a new house without one? Yet many home warranties are more like buying a car and only getting a warranty on the power train. Sure, it covers the main mechanics, but it still leaves out a lot of things that can go wrong. Or as Donna Johnsrud, a Dallas-Fort Worth, Texas, real estate agent, puts it, "A lot of people think a home warranty will cover everything that could possibly go wrong with a house when there are actually a lot of exclusions. It's important to read the fine print."

What's Usually Covered

Most home warranty providers offer a basic plan in the $300 to $400 range. They also offer premium packages and add-ons that can increase that number to $500 or as much as $1,000. Warranty prices also differ based on the size and type of home (i.e., duplex, condo, single-family, etc.). And there are slight pricing variations by state. In addition to premiums, under most plans the homeowner is responsible for a copayment averaging around $60 for service calls and repairs.

Basic plans generally cover the main mechanical systems of the house, including:

heating and air conditioning systems and ductwork

plumbing systems

electrical wiring/receptacles/switches

They also generally cover some appliances, including:

stove/oven

dishwasher

water heater

garbage disposal

built-in microwave

Limitations and Exclusions

Many repairs (e.g., plumbing, HVAC, electrical, appliances, etc.) have a limit that may not be enough to cover the cost. For example, many warranties cap the cost to diagnose, repair and/or replace an HVAC system at $1,500 per contract. However, the average cost of replacing a central air conditioning system or a gas furnace is around $5,000, including labor, according to HomeOwnerIdeas.com.

Policies also often cap plumbing and electrical repairs at $1,000 or so per contract (for each type of service). If you've hired a plumber or electrician recently for a major repair job, you know that $1,000 won't buy you much.

When costs exceed the limit, there are a number of ways the repair can be handled, according to Sallie Griffith, the regional accounts manager for OneGuard Home Warranties.

One option is that the warranty company will pay its portion and when the work is complete, the homeowner pays the remainder. Another is that the consumer can "cash out" and receive a check from the warranty provider for the full amount of the coverage, and then hire a contractor to do the work.

Griffith usually recommends the first option, because the warranty company gets a wholesale discount. So, consumers will often pay more for the repair if they hire their own contractor. On occasion, particularly with appliances, a homeowner may be able to find a lower price on a replacement appliance on sale, and in that instance, the warranty company will usually encourage the homeowner to cash out and purchase the appliance.

If a repair exceeds the limit and the homeowner is unable to pay the difference, the warranty company may be able to work out a payment plan between the contractor and homeowner so that the company pays its portion up front and the homeowner makes payments on the balance over time.

Even when a repair comes in under the limits of the warranty, it still might not be covered. For example, preexisting conditions are not covered. If a defect was detectable prior to the service period — even if you didn't know about it — it is not covered. If you use part of your residence as a home business, that area may not be covered under some plans. Items under a manufacturer's warranty are not covered. Components must fail on their own accord, not because of misuse, abuse, structural shifts/changes, freezing, electric surges, water damage, lightning, pest damage, mold, mildew, rot, fungus or acts of God. And you still have to perform routine maintenance yourself. So, for example, if you have a problem with your HVAC system and your filters are clogged, the warranty company may not cover the repair.

If there is a disagreement between the consumer and the warranty company, Griffith says the first step is to contact the company. The company should review the homeowner's case and respond in writing. If the response is negative, the next step is legal mediation. If the results of mediation are still unsatisactory, consumers could then go to the regulatory body in their state that oversees home warranty firms. In some cases that may be the state's real estate commission; in others it may be the state insurance regulator or attorney general's office.

Under most plans, the homeowner is also responsible for various out-of-pocket expenses in addition to copayments, for things like haul-away and disposal fees, work permits, corrections of code violations found during service, sales tax for new equipment, and refrigerant recovery and disposal. When it comes to copayments, it's important to realize that you are responsible for a new copay every time a contractor comes to your house, meaning you pay a copay for each call by a tradesman (e.g., plumbing, electrical, appliance, HVAC, etc.). This can add up to a large copay amount if a problem affects multiple systems. And since copays are usually in the $60 range, it doesn't make sense to file a claim for simple do-it-yourself repairs where the materials for the fix may cost only a few dollars.

It's also important to understand the warranty provider's responsibilities — or lack of them — for restoring items to their original condition. For example, when it's necessary to open walls, ceilings or floors for repairs, home warranties generally provide for restoring those surfaces to a rough finish only, meaning the finish work will be at your expense.

"The contractor will not restore walls, floors, tile, masonry, marble, wall coverings, cabinets, or similar items to their original condition. In some cases, you may be required to provide access," according to a brochure from Nations Home Warranty.

When replacing appliances, most policies say they are not responsible for matching color, brands or the same level of energy efficiency (e.g., Energy Star-rated), unless you pay for additional coverage. In general, the warranty company has sole authority when it comes to which contractors are hired, whether an item is repaired or replaced, and what materials are used to complete a job.

The Benefits of a Warranty

OK, you get the idea: Do your homework and read all the fine print so at least you know what you're getting before committing. Home warranties generally are not a good investment for a newly constructed home, as many come with a builder-backed warranty. When purchasing an older home, it's not uncommon to ask for — and receive — a one-year home warranty plan paid for by the seller; that will provide you with at least some protection if you just closed on a very ripe lemon and gives you a chance to see if a home warranty is right for you.

You should always have a house inspected by a licensed professional inspector before you buy, rather than simply rely on a home warranty to protect your investment after you already own it.

A home warranty can save you money if you need a major repair and it's covered. Also, with a home warranty, one phone call may solve all your problems, avoiding the hassle of finding qualified contractors. And many people purchase home warranties primarily for the peace of mind they provide, which is one reason why, according to OneGuard Home Warranties, the industry average renewal rate for home warranties is nearly 40 percent.

And if you're a homeowner who is "mechanically challenged" when it comes to doing even the simplest home repairs, it may be more cost-effective to invest in a warranty instead of trying to fix things yourself and then paying a pro to do the job right.

Jeff Yeager is the author of four books, including How to Retire the Cheapskate Way and The Cheapskate Next Door. You can follow him on Facebook and Twitter.